May We Help You? - Factsheets explained

Of all financial products, mutual funds tend to make high levels of disclosures, usually through the periodical ‘factsheets'. Here's a primer on how best you can read factsheets.

Fund views

All monthly disclosures start with views of the fund house on the fundamentals of the economy, equity and bond markets in the month gone by as well as its expectations, going forward.

These articles talk about the major events that occurred over the month, as well as those that affected the markets and inflows into it. Some fund houses also give an account of the sectors that they are bullish on. For example, one fund house may not believe in taking a big cash position , while another may take a conservative stance during market corrections and move significantly into cash. This section makes an interesting read, especially when markets fall or gain heavily, as fund managers dwell on what helped or went against their funds.

Portfolio and returns

Subsequent pages dwell on individual schemes and their investments in various stocks and bonds. This is the most-followed part in a factsheet as the fund discloses the stocks and bonds it has invested in. Some funds give their entire portfolio of stocks while others give out their top 10 holdings. Funds also give details of sectors they are invested in.

It is important for investors to note if the fund concentrates on certain stocks or sectors, as this can then peg up the fund's risk element. Gauging the fund's investment style, therefore, can help understand its risk profile. The fund also gives the returns it generated over a six month, one, three and five-year period from the date of the factsheet. For comparison, returns of the benchmark are also given. Note that most funds also give the returns that are generated through the SIP route.

Investors can use the data to check whether the fund's NAV change over a period of time has been more than the change in its corpus size over the same period. If yes, this suggests that the fund may have suffered higher outflows/redemptions, unless there was a dividend paid out.

The ratios

Standard deviation tells us how volatile the fund's returns have been in relation to its average. The higher the number, the more volatile is the fund's returns.

Sharpe ratio measures the risk-adjusted returns that the fund generates. In other words, it is the returns generated by the fund over risk-free returns, for a given unit of risk measured by the standard deviation.

Beta captures how much a fund's returns move in relation to a change in its benchmark's returns. A beta of 1 indicates that the fund moves in tandem with its benchmark, while a beta greater than one indicates that it rises and falls more than the benchmark. A beta of less than one suggests that the fund is less volatile than its benchmark.

Expense ratio is the percentage of total assets that is paid as management fees and also covers the everyday costs of running a mutual fund. Actively-managed funds typically have higher expense ratio.

Use these ratios to compare funds with similar mandates across fund houses.

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